Washington Restaurant Market Watch: Restaurants respond to wage increases

Washington Restaurant Market Watch: Restaurants respond to wage increases https://wahospitality.org/wp-content/uploads/2016/04/fastcasual2016a.jpg

By Paul Schlienz

The minimum wage is going up. So how do you respond?

This is the question restaurants are asking themselves as minimum wage increases higher than that of Washington state are mandated by voters, as in Tacoma and SeaTac, or by city councils, as in Seattle.

In an industry with notoriously narrow profit margins, getting the balance right between wage increases for employees and increased costs to consumers is a must, not an option.

There is no one right answer, no tried and true rule book to follow and no restaurant operations guru who can give you a one-size-fits-all formula that will make everyone happy.  What we do have are a few pioneers who are getting their bearings in the brave new world of higher wages and finding what works best for their bottom line, their employees and their guests.

Some restaurants are switching from tipping to higher overall costs. Others are moving toward service charges instead of tips.

One thing these operators all have in common is that they put serious thought into their response to higher wages before making their move. This, after all, is not a decision to be taken lightly.

“Be very careful and do your homework,” said Pamela Hinckley, CEO of Seattle’s Tom Douglas Restaurants, the city’s largest upscale restaurant group. “It’s very expensive if you don’t get it right. Before you decide what you’re going to do, run some different compensation models and see what impact higher wages will have. We want to make sure we get it right. That’s why we’re going slowly.”

Tom Douglas Restaurants replaced gratuities with a 20 percent service charges at Dahlia Lounge, Palace Kitchen and The Carlile Room in February.

“We were worried about it when we did it,” Devony Boyle, human resources director at Tom Douglas Restaurants, said at the 2016 Northwest Foodservice Show, in Seattle. “We were hoping it would go well, and it has. We haven’t had any negative feedback.”

As a result, the Tom Douglas’ other high end eateries will also eliminate tipping in favor of service charges in mid-April.

“With the service charge model, the money goes directly to the company, so we are able to equitably distribute it rather than having our employees at the mercy of a tip,” said Hinckley. “Servers also get commissions, and the rest of the staff gets revenue sharing. This is a much more predictable compensation model for our employees.”

Seattle’s famous seafood chain, Ivar’s, however, took a completely different route in response to the city’s minimum wage increase. It simply raised prices by 21 percent to incorporate a moderate labor increase of 4% and well as a gratuity average of 17% based on the company’s historical guest data at its Acres of Clams and Salmon House high end eateries.

“We saw Seattle’s $15 minimum wage law as an opportunity to right some of the serious discrepancy between the back-of-house and front-of-house,” said Bob Donegan, president of Ivar’s. “We asked ourselves if we could reallocate our revenue model  and bring up everyone’s income, especially raising kitchen salaries. And it worked. By going to a tip inclusive model, we took all hourly employees to a minimum of $15 an hour immediately and put all the hourly staff on a revenue sharing system which distributes the funds  so the entire team shares in the success of the restaurant.

And how did Ivar’s employees respond?

“All of our employees are doing better under the new system,” said Donegan. “We now have 21 percent more revenue to share with our employees, and none of this new revenue goes to the company. We have only lost one server over this issue, and he has asked for his job back.”

One change Ivar’s did make after instituting its price increase was related to that tried and true American tradition of tipping.

“About two weeks after we took the tip line off of our checks, we added it back because guests were saying, ‘We get it. You’re taking full responsibility for your employees, but we still want to tip,” Patrick Yearout, Ivar’s director of recruiting and training, said at the 2016 Northwest Foodservice Show. “We put the tip line back on, saying ‘Tipping is not expected, but if you’d like to do so, here’s a line.’ ”

With minimum wage increases and other pressures, the restaurant model is rapidly changing. Donegan urges other restaurant operators not to get left behind by the political process.

“Restaurant operators will confront government actions more often,” said Donegan. “It is very important to be involved in the process. You can’t complain about what government does if you are not involved in the process.”

For more in depth coverage of this topic, keep an eye out for the May 2016 issue of Washington Restaurant & Lodging, published jointly for the hospitality industry by the Washington Restaurant Association and Washington Lodging Association.